Millions in concessions sway California opponent; Company talks with other states that could object
The Indianapolis Star
California’s insurance commissioner on Tuesday announced he had dropped his objection to Anthem Inc.’s plan to acquire WellPoint Health Networks, paving the way to create the nation’s largest health benefits company in Indianapolis.
In a teleconference held in a Los Angeles medical clinic for the poor, John Garamendi said he had signed off on the $16.4 billion deal after wrangling more concessions from Anthem.
The company agreed to boost its investment in California health care programs to $265 million from $115 million. Anthem also promised not to use premiums from the California-based Blue Cross Life subsidiary that Garamendi’s office regulates to help pay for the acquisition of WellPoint, Garamendi said.
“I continue to have misgivings about the consolidation of health insurance companies, but those concerns are beyond the normal scope of my review,” he said.
Before it completes the acquisition, Anthem must make sure insurance commissioners in nine other states who have a say in the deal don’t object to the rich concessions Anthem granted to California.
In a joint statement, the companies said Tuesday that they were in talks with other state officials.
“We are well-prepared to quickly and successfully integrate our two organizations,” said Larry C. Glasscock, Anthem’s chairman, president and chief executive.
Anthem spokesman Ed West said it was too early to know whether other states would demand similar concessions. “We’ll know the answer to that pretty quickly,” he said.
West said Anthem has told all state regulators where the companies do business that policyholders in those states won’t bear any of the costs of the merger. The deal will be financed with cash on hand, by shareholders and through merger-related savings, Anthem officials have said.
West wouldn’t predict when the merger could be completed.
“Drastically” changed deal
The California concessions may prompt other states to ask for similar deals, said Dawn Touzin, director of the community health assets project at Community Catalyst, a Massachusetts consumer group that has opposed Anthem’s merger plans in other states.
“Garamendi has essentially thrown the hand grenade out of his foxhole, and I’m not sure where it’s going to land,” she said. Other insurance commissioners “would be wise to recognize that the nature of what they approved has changed drastically” because of the concessions granted in California, she said.
Garamendi rejected the mega-deal in July, provoking a lawsuit from Anthem to try to overturn his decision in the California courts. The lawsuit was slated to go to trial in February but will now be terminated because of Garamendi’s approval, Anthem said.
Indianapolis-based Anthem and WellPoint, of Thousand Oaks, Calif., announced the deal in October 2003. The approval process, which included endorsements from the Department of Justice and nine other states, plus overwhelming votes in favor of the deal from shareholders, had gone smoothly for Anthem and WellPoint until Garamendi’s opposition surfaced in late spring. Garamendi was the sole holdout among state insurance regulators who had a say in approving the deal.
The opposition
Garamendi, a Democrat who is elected to the commissioner job, had blasted the deal as being harmful to WellPoint‘s 7 million California policyholders. He said the takeover by Anthem would siphon capital from WellPoint‘s California operations and unfairly enrich WellPoint executives with $147 million to $356 million in merger-related bonuses and severance payouts.
The settlement with Garamendi, which participants said was hammered together in the past week and signed Monday night, does not call for reducing the executive compensation.
West said Anthem expects the merger-related compensation will run about $200 million.
To try to win Garamendi’s support early on, Anthem pledged to invest $100 million in the Healthy California Program, which extends health care in rural and medically underserved communities in the state. Anthem also agreed to donate $15 million to enroll more children in a California program to promote healthy families.
The new spending commitments, which run over several years, include another $100 million to the Healthy California Program, $35 million in grants to health clinics that serve the poor and $15 million in nurse training.
If the executive payouts top $265 million, Anthem has agreed to increase by a like amount the concessions it’s giving to California, Garamendi said.
Gil Ojeda, director of the California Program on Access to Care, a public service arm of the University of California, called the money from Anthem to benefit health care for the poor “pretty modest.” But, he added, “The bottom line, it is a better agreement than was on the table” before the latest changes negotiated by Garamendi.
Missouri’s insurance department “will need some time to digest” the California agreement to see if it negatively affects Missouri’s policyholders insured by WellPoint, said Randy McConnell, a department spokesman.
Georgia’s insurance commissioner, John Oxendine, said in a statement that he will be “reviewing these new developments and evaluating their impact on Georgia consumers.”
Seven other states, plus Puerto Rico, may review the terms of the California deal: Delaware, Illinois, Oklahoma, Texas, Virginia, West Virginia, Wisconsin.
Garamendi’s opposition was a sticking point to the entire merger because his office oversees WellPoint‘s self-insured business in California, a lucrative segment that generated about a fourth of WellPoint‘s total profit last year.
Anthem plans to make Indianapolis the headquarters of the combined company, which would use the WellPoint name and be the Blue Cross or Blue Shield licensee in 13 states. The merged company will have revenue of more than $40 billion and handle health coverage for 26 million Americans.
Anthem’s share price rose $4.73 in trading Tuesday, to close at $91.23. WellPoint shares jumped $8.93, to $113.90.
The deal calls for Anthem to pay one of its shares plus $23.80 in cash for each WellPoint share.
Deal with California
California Insurance Commissioner John Garamendi dropped his opposition to the merger after Anthem:
* Increased the amount it will give to benefit California health care to $265 million from $115 million over several years.
* Pledged not to use premium revenue from policyholders of Blue Cross Life, the WellPoint subsidiary that Garamendi’s office regulates, to help pay for the merger.
* Agreed to limit payouts to WellPoint executives to $265 million or pay a dollar-for-dollar penalty for exceeding that cap.
News boosts stocks
Wall Street reacted enthusiastically to the deal. Anthem shares gained 5.5 percent; WellPoint shares rose 8.5 percent. Chart, A10
What’s next
Nine other states that previously approved the merger can reconsider in light of the concessions negotiated in California. If they object, Anthem and WellPoint would have to reopen merger talks and seek new state regulatory approvals.
Health benefits firm would be largest in U.S.
A merged Anthem and WellPoint, which cleared its last major hurdle Tuesday, would serve 26 million customers in 13 states.
The road to a merger
Here’s a look at Anthem and WellPoint Health Networks and the steps leading to their proposed merger.
Anthem Inc.
Established: In 1944, by combining two Indianapolis-based insurance companies.
Brands: Anthem Blue Cross and Blue Shield
Headquarters: Indianapolis
Employees: about 20,000
Total assets: $12.3 billion
Total liabilities: $6.9 billion
Customers: 11.8 million
2002 revenue: $13.3 billion Profit: $549.1 million
2003 revenue: $16.8 billion Profit: $774.3 million
WellPoint Health Networks
Established: In 1992, in 1996, WellPoint and Blue Cross of California merged.
Brands: Blue Cross, Unicare
Headquarters: Thousand Oaks, Calif.
Employees: 16,200
Total assets: $11.3 billion
Total liabilities: $7.3 billion
Customers: 14 million
2002 revenue: $17.3 billion Profit: $703.0 million
2003 revenue: $20.4 billion  Profit: $935.2 million
Anthem, WellPoint merger chronology
2003
Oct. 27: Anthem Inc. discloses its $16.4 billion friendly agreement to buy WellPoint Health Networks of California. The deal would create the largest U.S. health care benefits company, headquartered in Indianapolis. It will serve 26 million customers.
Oct. 28: WellPoint shareholders file a class-action lawsuit over the proposed merger.
2004
Feb. 27: The Justice Department gives Anthem the green light to buy WellPoint.
March 23: Anthem announces that the transfer of WellPoint‘s licenses has been approved by the Blue Cross Blue Shield Association.
May 19: The Foundation for Taxpayer and Consumer Rights, a nonpartisan advocacy group, calls on California Gov. Arnold Schwarzenegger to order regulators in California to have a public hearing on the proposed merger.
May 21: A special committee is formed by Democratic leaders in the California State Assembly to examine the pending sale. California is the only state to balk over the merger. The state’s insurance commissioner and the Department of Managed Health Care must approve the deal.
June 9: The California State Assembly’s special committee holds a hearing meant to give consumer groups, regulators and others time to air concerns about the proposed takeover. At the hearing, John Garamendi, California’s insurance commissioner, said the deal was “not in the best interests” of the state but stopped short of saying he would withhold his agency’s approval.
June 14: The California Public Employee’s Retirement System announces opposition to the deal.
June 25: A second public hearing is held. Garamendi questions how the two companies would finance the $4 billion needed to complete the deal.
June 28: Nearly 97 percent of the voting shares at Anthem and WellPoint are voted in favor of the merger.
July 9: A third California hearing is held focusing on tax issues. Anthem Chief Executive Officer Larry C. Glasscock promises insurance premiums will remain stable, jobs will not move from California and Blue Cross will continue its community involvement and charitable giving.
July 23: Garamendi rejects the proposed merger. The Department of Managed Health Care announces its approval of the merger.
Aug. 3: Anthem Inc. files a lawsuit against Garamendi, asking the Los Angeles County Superior Court to overturn his rejection of the merger.
Aug. 25: Garamendi asks a judge to throw out Anthem’s lawsuit.
Nov. 9: Garamendi announces that he has signed off on the merger.
Sources: Corporate Web sites, BigChart.com, staff research
Where Anthem operates: Colorado, Connecticut, Indiana, Kentucky, Ohio, Maine, New Hampshire, Nevada, Virginia
Where WellPoint operates: California, Georgia, Missouri, Wisconsin
Number of members:
Anthem/WellPoint: 26 million
UnitedHealth Group: 20 million
Aetna: 13.2 million
Cigna: 11 million
Sources: Hoover’s Company Capsules, Star staff research
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Star reporter J.K. Wall contributed to this report.
Contact Star reporter Jeff Swiatek at: (317) 444-6483 or [email protected]
